4 charts show $6 trillion crash after Xi takes power

  • China’s President Xi Jinping has consolidated his power – and that has shaken the markets.
  • Investors dumped Chinese stocks in a $6 trillion blowout as Xi excluded reformers from decision-making.
  • These 4 charts show how deep the meltdown in China-related assets went last week.

China’s leader Xi Jinping has consolidated his power and locked out reformers to effectively take sole responsibility for the world’s second-largest economy – and it has rattled markets.

President Xi unveiled a new decision-making team composed of like-minded political allies at the Communist Party Congress last week, publicly disregarding his pro-business predecessor.

Frightened investors dumped Chinese stocks in a $6 trillion blowout on Monday, according to Bloomberg data. Meanwhile, the tightly managed onshore yuan continued to lose ground against the dollar after already falling sharply this year.

The Chinese president has spearheaded a zero-COVID approach to the pandemic and cracked down on the business activities of tech companies like Jack Mas Alibaba. Therefore, when Xi made his move, the market reacted with concern that ideology would prevail rather than Beijing’s brand of capitalism.

“This strong consolidation of power is adding to investor unease,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a recent research note.

These four charts capture the chaos that has rocked the Chinese markets.

Hong Kong’s Hang Seng index, which lists many of China’s biggest stocks, plunged 6.36% on Monday, marking its biggest one-day drop in 2022.

That’s the biggest drop in 14 years, according to Refinitiv data – meaning the sell-off was the worst since the 2008 financial crisis.

“Equity valuations that are already close to a 10-year low are likely to come under more pressure as international investors demand a higher risk premium,” said UBS’s Haefele.

The Hang Seng’s fall put the deep lows it hit during the 2008 crisis to the test. It tanked 1,030 points Monday for the lowest close since 2009, according to Refinitiv data.

The slump built ahead of the annual convention as COVID-19 containment measures, a crisis in the Chinese real estate market and growing fears of a recession weighed on stocks.

China’s economy grew 3.9% year-on-year in the third quarter, falling well short of Beijing’s annual target of 5.5%. Analysts expect Xi’s power consolidation to fuel further declines.

“We are likely to see policy intensification that tends to slow potential growth in China,” Goldman Sachs strategists said in a statement. “We are closely monitoring the signals from Xi’s inner circle as we should learn a lot over the next few months.”

Even U.S.-listed companies are watching the slowdown, as Tesla cut the price of its electric vehicles by 9% in China amid slowing consumer demand.

Meanwhile, the tightly managed onshore yuan continued to slide against the rapidly appreciating US dollar. It fell near a 15-year low on Tuesday after the People’s Bank of China set its midpoint at its lowest level since 2008.

The central bank “fixes” the currency within a set range of levels against the dollar. But the yuan is still down 17% year-to-date as gargantuan rate hikes by the Federal Reserve lured foreign investors into the greenback.

Under Xi, the People’s Bank of China has tended to favor softer yuan fixes, allowing the currency to depreciate. The renminbi is likely to fall further now, strategists said.

“The daily fix’s sudden jump above 7.16 after capping below 7.12 throughout Congress was interpreted by the market as tacit approval of a weaker yuan,” said Eugenia Victorino, head of SEB’s Asia strategy.

A fall in the yuan weighs on China’s economy by driving up inflation because when a country’s currency weakens, its imports become more expensive. That could lead to China’s central bank being drawn into a “reverse currency war” with the US.

The Nasdaq Golden Dragon China Index, which tracks U.S.-listed companies that do primarily business in China, fell 14.4% on Monday — and is down 43.9% year-to-date.

Alibaba, the largest US-listed Chinese stock by market value, fell 12% on Monday and is down about 46% so far this year. Chinese giants Baidu and JD.com have seen a similar slump.

CFRA on Tuesday urged investors to sell their Alibaba shares, arguing that Xi’s ousting of his predecessor was a turning point.

“The downside risk bottomed when Hu Jintao was carried out the door,” said John Freeman of the research firm.

Continue reading: Treat Tesla like a Chinese tech stock because Elon Musk’s company makes a lot of profit there, says Morgan Stanley

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